29 September, 2016
Introduction
Last October in Hong Kong, this topic was featured at our Master Class presentation at Hotel Investment Conference Asia Pacific. We had a panel of senior industry experts and an audience of in excess of 250 enthusiastic attendees. Click here to view the presentation.
Branded residences are residential developments which are branded typically by an international hotel management company. In our experience branded residences usually form part of a mixed use development which also contains a hotel (operated by the same management company) as well as potentially other components such as retail and commercial. The mixed use development can take the form of a commercial tower or a hotel surrounded by branded residential villas.
In the intervening period since the Hong Kong conference we have continued to work on these developments all around the region. This product line has continued along its evolutionary path becoming more sophisticated and adapting to new markets and brand segments. Branded residences can be found in major urban centres as well as recreational destinations such a beach resorts and ski fields. The greatest concentration of branded residences is at the luxury/super luxury end of the market but increasingly the branding is moving down the star ratings.
Please refer to page 8 of the presentation where we have inserted a diagram of a typical Branded Residence legal structure. It will be self evident that these developments require intricate and complicated legal arrangements.
Below we will address a number of the more interesting issues that these structures produce. For the purposes of our discussion we will use a hotel/branded residence commercial tower as the example. Similar but not identical issues arise for a hotel surrounded by branded residential villas. By virtue of the fact that the structuring of branded residences is determined by the degree of sophistication of local property laws, the discussion below can be affected by the idiosyncrasies of individual legal jurisdictions.
1. Is the branding for the residences typically the same as the branding for the hotel?
Yes
2. How does the branding work for the residences?
Usually the operator grants the developer a licence to sell the residence incorporating reference to the brand. Typically this is for a duration of around 3 – 5 years.
Additionally, the operator grants an owner's corporation a licence to refer to the brand for a term which usually is the same as the hotel management agreement.
3. What is the interrelationship between the term of the hotel management agreement and the term of the branding?
Usually if the hotel management agreement terminates for any reason then this automatically terminates the licences relevant to the branded residences.
If either of the licences for the branded residence terminates then this usually does not produce an automatic termination of the hotel management agreement.
4. What fees are charged by the operator with respect to the branded residences?
The operator usually charges a percentage of the sale price of each residence. If any of the residences is not sold for a time and let out for rental then usually the operator charges a percentage of the rent.
The licence usually contains provisions to the effect that:
- the operator is entitled to terminate the licence if the developer does not sell a specified number of residences within a specified time period;
- generally residences must be sold for their arm's length value;
- the developer may seek to negotiate a concession to the effect that a certain number of the residences be held back by the developer or sold for less than the arms length price; and
- the operator has stringent rights to vet any information provided to prospective residence purchasers and also has rights to anonymously attend sales presentations to ensure that representations are not made inconsistent with the operator's understanding.
5. How does the operator seek to ensure that the branded residences are maintained to brand standards ?
Usually the operator seeks to contract with the owner's corporation to maintain the common areas of the branded residence component. The owner's corporation contracts to maintain the common areas consistent with brand standards. The operator produces an annual budget which will be necessary to achieve this outcome. The owner's corporation is then required to levy the branded residence owners.
6. What happens if the common areas of the branded residences are not capable of being maintained to brand standards because of insufficient funding by the owner's corporation?
This usually gives the operator the right to terminate the branding.
7. Does the operator provide the branded residence owner with the right to use the intellectual property rights attaching to the brand?
In our experience usually not. The reason for this is it is usually a precondition that the developer guarantees that the branded residence owner will not contravene the terms of the licence. For a variety of reasons the developer is usually reluctant to provide this guarantee especially if it would continue to operate after all residences have ben sold and the developer has effectively exited its involvement with the development.
Conversely, the operator will provide the owner's corporation (and through it the branded residence owners from time to time) with the right to refer to the building in a way which identifies the branding without the grant of any intellectual property rights, (for example, at the time a residence owner wishes to sell his or her apartment, a right to refer to the apartment as an apartment in the [relevant brand] apartment building.)
8. What if a branded residence owner wishes to make its residence available as part of the accommodation inventory of the hotel ?
This is a commercial matter but it is not unusual for this option to be made available to the residence owner at the time of initial purchase. If the option is taken up then the residence owner is usually required to acquire a standard furniture pack and make the residence available for a specified period under a lease or management arrangement with the hotel.
9. Do any issues arise if the branded residences share entry ways or facilities with the hotel?
This can be contentious as the brand standard requirements of the hotel may be significantly greater and hence significantly more expensive than would be the case for residential accommodation (for example concierge service).
10. What hotel services are usually made available to the residence owners and occupants?
This is usually a commercial matter but residence owners and their guests are usually treated the same way as hotel guests. In some instance residence owners and their guests may be entitled to benefits not made available to some or all of the hotel guests.
11. Are there usually any restrictions on the residence owners leasing out the residence on a short term basis?
Yes. The hotel usually frowns on any of the residences being made available for short term accommodation in competition to the hotel.
For further information, please contact:
Graeme Dickson, Partner, Baker & McKenzie
graeme.dickson@bakermckenzie.com
